Whitworth Urges Timken to Spin Off Steel Unit

Nov. 28 (Bloomberg) -- Ralph Whitworth’s Relational
Investors LLC and California State Teachers’ Retirement System
took stakes in Timken Co. to urge the bearings maker to spin off
its steel unit, spurring the stock’s biggest gain since 2009.

Relational owns 5.7 percent of shares and the California
retirement plan known as Calstrs has 0.4 percent, according to a
filing with the U.S. Securities and Exchange Commission.
Calstrs, the second-biggest U.S. pension plan, submitted a
proposal to be voted on at the next Timken annual meeting that
recommends hiring an investment bank to sell the steel unit as a
separate company.

Relational, which has $6 billion of assets and has used
shareholdings in companies such as Illinois Tool Works Inc. to
push for change, met in August with Timken management and board
members to recommend the spinoff. The hedge fund, now the
largest single investor in Timken based on data compiled by
Bloomberg, said the two businesses don’t fit, with the steel
unit being a materials company and the bearings one classified
as an industrial.

Timken evaluated Relational’s spinoff plan with input from
outside financial advisers and decided against it, Chief
Executive Officer James Griffith said in a statement. Over the
years, the company has studied the separation of the two units,
he said.

‘Significant Technology’

“We have significant technology, cost and revenue
synergies between our bearing and steel businesses as well as
diversification benefits in continuing to operate under our
current structure,” Griffith said.

Timken, based in Canton, Ohio, rose 12 percent to $46.23
at the close, the biggest gain since March 2009.

“The unquantified synergies that the company points to in
defending the structure are far outweighed by the value that
could be unlocked in separating the businesses,” Whitworth said
this evening in a telephone interview. “The diversification of
the company is actually what is causing the discount of stock,
which is severe. We think it is up to 50 percent.”

Timken’s shares should trade higher compared with peers,
Gary Farber, an analyst with CL King & Associates in New York,
said in a telephone interview. Diversified industrial companies
trade at an enterprise value that’s seven to eight times greater
than earnings before interest, taxes, depreciation and
amortization, and Timken trades at four to five times, Farber
said.

“The stock is undervalued, and the company should command
a higher valuation as it is today,” Farber said.

Costly Separation

In its proposal, Calstrs said the stock is undervalued
because of the “combination of two incongruent businesses,”
according to the filing. The split wouldn’t “destroy any
existing synergies” because the steel unit only provides 10
percent of the material the bearings business uses, the pension
fund said, citing information from a 2011 Timken investor
conference.

``The peer companies that are competing with them in both
businesses operate independently,'' Whitworth said. ``The fact
that they source from their steel unit wouldn't be an
impediment to separating.''

Still, it can be costly to separate companies and it would
create two sets of management for the steel and ball bearing
businesses, which are both profitable, said Eli Lustgarten, an
analyst with Longbow Research, in a telephone interview.

“The question is, ‘Will it improve the shareholder value
versus the long-term benefit to the company?’ That’s where the
debate is,” Lustgarten said. “There’s no clear-cut answer to
this.”

Founding Family

Relational becomes the largest single shareholder, ahead of
the Timken Foundation, which has a 5.3 percent stake, according
to data compiled by Bloomberg. Members of the founding family,
including Chairman Ward J. Timken Jr., control the foundation.
Family members in aggregate have sole or shared voting power
over 10.3 percent of the company’s shares, according to a March
filing. There are no voting agreements or other arrangements
among the members of the Timken family regarding their shares,
according to the filing.

Illinois Tool agreed in August to sell a majority stake in
its decorative surfaces division for $1.1 billion after pressure
from Relational to reduce the number of business units.
Relational owns a 3.1 percent stake in Illinois Tool, the
seventh-largest investor, according to data compiled by
Bloomberg.